Many who have a small business, or receive 1099 income or get income via a K-1 ask about the need to make Estimated Payments toward their tax bill. This question applies to both the Fed and States that have an Income tax. The IRS and state tax agencies want their money asap and require that individuals (not regular W-2 wage earners) who earn incomes that does not have withheld taxes make periodic (quarterly, sort of) Estimated Payments. The form for the Fed is 1040 ES and states have equivalent forms like Illinois' IL-1040 ES. These are generally sent in quarterly though the due dates have been altered for covid at the Fed level and some, though not all States have followed that lead. The 2020 official due dates for Estimated Payments are:
- 1st & 2nd Qtr due 7-15-20
- 3rd Qtr due Sept 15
- 4th Qtr due Jan 15th 2021
If making Estimated Payments is a new subject for you, I am here to help but you should always have a good personal understanding of the various requirements so review P505 published by the IRS at https://www.irs.gov/publications/p505. It may look daunting but once you get the gist it's not too bad. You can also call me for further explanation.
The IRS and Sates impose a Penalty and charge interest when you fail to make ES payments in a timely fashion and also if you fail to meet the requirements of one of the two SAFE HARBORS for the amount paid annually. The two safe harbors are 1. to pay 100% of last year's tax or 2. pay 90% of the current year's tax at filing. In both cases no penalty will be assessed if either is achieved. Estimating the tax that will be due can be tricky. The IRS provides a good worksheet with form 1040 ES and the time spent to complete it will go a long way toward keeping you penalty free. The shortcut of paying equal quarterly installments that come to 100% of last year's taxes paid is an easy way to go. It might be high or it might be low but in that it is at least 100% of last year's tax you are safe. Hence the name, SAFE HARBOR. Remember, over payments get refunded.
Of course, there are times when cash is dear and a payment might need to be delayed or skipped in its entirety. The world won't explode but you will get dinged with a penalty and interest until it is paid off. I always recommend catching up asap to minimize the interest.
If you need help figuring your Estimated Payments call me. If you are a tax prep client, I can then supply completed 1040 ES vouchers. It is YOUR responsibility to mail in the ES payments on time but I am here to assist the process.
ADVICE: DON'T JUST WAIT TO PAY YOUR TAXES WHEN FILING,. MAKE ES PAYMENTS PER THE ABOVE DUE DATES. And if something occurs and you find yourself in a bit of a fix, call me.
Best,
Donn Marier